by Kim | Jun 12, 2023
Key events this week – Monetary policy decisions; FOMC, ECB, and the BoJ, US CPI & Retail Sales, Aus Employment, Euro Area CPI
Recap from last week
Both the RBA and BoC have restarted policy hikes, citing persistent inflation. The RBA hiked for the second month in a row after pausing in Apr. The statement reflected a renewed concern for upside inflation risk and inflation expectations becoming entrenched. A notable change in the statement was the removal of “medium-term inflation expectations remain well anchored”. The Board noted concerns globally over persistent services inflation, higher unit labor costs, and ‘subdued’ productivity growth. Guidance was clear; some further tightening may be required. Markets priced in another hike for later in the year. Aus growth eased in Q1 with GDP slowing to +0.2%. This week, the May labor market survey is expected to show employment increased by +15k and the unemployment rate remained at 3.7%.
The BoC also hiked after being on pause since Jan. The Governing Council noted an increase in the pace of inflation and stronger growth in consumption across ‘interest rate sensitive goods’ including a pickup in housing market activity. The hike reflects the view that ‘monetary policy was not sufficiently restrictive’ to bring inflation sustainably back to the 2% target. The Governing Council has kept the option open to assess the next move in rates. Last week, Canadian employment declined and there was a small uptick in the unemployment rate.
US data remained mixed. The uptick in initial claims to +261k was notable and something to monitor. The S&P PMIs continued to show a divergence between stronger services momentum and sluggish manufacturing activity in May. The S&P PMI report showed that services activity broadly accelerated this month – led by “the fastest increase in output in just over a year”, while the ISM services PMI has started to show some moderation in service sector growth. US consumer credit growth continued to rebound in Apr.
Outlook for the week ahead
This will be a big week of central bank policy decisions. The FOMC is broadly expected to keep its policy rate on hold at 5.25% (approx. 26% probability of an increase at the time of writing) while maintaining a hawkish bias. The FOMC will present an updated set of projections across inflation, growth, unemployment, and the FFR. The projections are likely to show an expectation for some further tightening and guidance may reinforce keeping optionality for further hikes. The FOMC will have the latest CPI report for May, which will be released this week. Headline US CPI is expected to ease to +4.2% over the year, while core inflation is expected to remain elevated at +5.1% over the year (+0.4% over the month in May). US retail sales are expected to show some further moderation in demand with growth slowing to 0% in May (from +0.4% in Apr).
The ECB is expected to hike its policy rate by 25bps. The forward guidance on rates will be important given that the growth outlook has weakened notably over the last two quarters and inflation may be starting to moderate. The May inflation report showed inflation still elevated, but easing to +6.1% led by a large fall in energy prices. Core inflation ex-energy is still running at +7% over the year.
The BoJ will also meet this week. While there is no signal or expectation of an impending change to policy settings, there is likely to be some risk from here that the BoJ will tinker with its YCC. The Japanese economy continued to rebound with growth accelerating to +0.7% in Q1 from +0.1% in Q4 – led by household consumption, private investment, and inventories. Core inflation remains elevated and above the 2% target suggesting some pass-through from stronger growth. This momentum continued into May with both manufacturing and services PMI’s rising further.
This week, the US Treasury will auction and settle approx. $452bn in ST Bills, including Cash Management Bills (CMBs), Notes, and Bonds, raising approx. $127bn in new money. With the debt limit now suspended (through to Jan 2025), the focus shifts to rebuilding the US Treasury TGA cash balance. Last week, the US Treasury announced details to rebuild the cash balance which included a focus on shorter-tenor securities through to 14 Jun and the introduction of a regular 6-Week CMB.
QT Jun: Approx $11.7bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $15.1bn in ST Bills, Notes, and Bonds will mature and roll off the Fed balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | Jun 5, 2023
Key events this week – US ISM Services PMI, RBA & BoC policy decisions, global services PMIs
Recap from last week
US labor market data provided conflicting signals from the latest non-farm payrolls report and household employment survey. But with so much monetary policy tightening already done, Fed speeches this week continued to signal a possible skip/pause for next week. We are now heading into the blackout period ahead of next week’s FOMC meeting.
US non-farm payroll growth in May was much stronger than expected at +339k (expecting a further slowdown to +180k). The prior two months were revised higher by approx. +90k jobs. This lifted the growth momentum back above recent averages. Despite the stronger payrolls growth, the household survey recorded a fall in employment and this flowed through to an increase in unemployment. Across the 16yrs+ group, the fall in employment was mostly PT jobs, but FT employment also declined slightly. Another view of the fall in employment was that private sector wage and salary employment increased, but was more than offset by falls in government and self-employment for the month. The unemployment rate increased from 3.4% in Apr to 3.65% in May. Last month we noted that the unemployment rate had been rising within the core working age group (25-54yrs). This trend continued in May and the 25-54yr unemployment rate has increased, albeit slightly, from a historically low level of 2.95% in Dec to +3.25% in May. The average hourly earnings data showed only a slight slowdown in wage growth from +4.4% in Apr to +4.3% in May.
The Fed Beige Book report indicated little change in growth momentum between Apr and May. Only two districts reported worsening conditions; New York and Philadelphia. The report noted that financial conditions were stable or somewhat tighter across all of the districts. High inflation “continued to stress the budgets of low-and moderate-income households”.
The US ISM manufacturing PMI showed no improvement in manufacturing growth momentum in May, but employment growth remained stable.
The global manufacturing PMI showed no change in growth momentum, with the headline index remaining in slight contraction territory. Underlying that, output growth improved slightly as new orders continued to contract. Global input and output prices fell for the first time in three years.
Outlook for the week ahead
There will be two central bank meetings this week. Firstly, the RBA is expected to keep rates on hold this month at 3.85%. Over the last week, markets have priced in another hike around Aug/Sep – especially after the increase in the minimum wage and another sticky inflation reading. Aus GDP growth for Q1 will be released and is expected to be higher at +0.8%.
Secondly, the Bank of Canada is expected to stay on hold this month at 4.5%. The latest Canadian labor market survey will be released, and employment growth is expected to ease while the unemployment rate is expected to stay at a low 5%.
This week we get a reading on the globally stronger services growth momentum. The US ISM services PMI will be released this week along with the suite of S&P global services PMIs. In the US, the ISM services PMI has shown some slowing of momentum while the S&P services PMI has recorded stronger momentum.
Other data includes; US Factory Orders for Apr, German Factory Orders & Industrial Production for Apr, Europe and Japan GDP for Q1, and China CPI for May.
This week, the US Treasury will auction and settle approx. $352bn in ST Bills, including Cash Management Bills (CMB), raising approx. $89bn in new money.
QT Jun: Approx $8.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $2.2bn in ST Bills will mature and roll off the Fed balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | May 29, 2023
Key events this week – US Non-Farm Payrolls, Euro Area CPI May, Aus Monthly CPI
Recap from last week
The latest FOMC minutes showed uncertainty about the path of rates in the outlook and the extent to which further rate increases would be appropriate. Members noted the need for policy optionality. Views on the outlook diverged among committee members. Progress on reaching 2% inflation could be too slow so additional hikes could be warranted or, if the economy evolved according to some outlooks, then further policy firming may not be necessary.
Data so far had not ‘provided sufficient clarity’ for the policymaker’s next steps, so Governor Waller introduced a framework option for the next FOMC meeting; hike, skip, or pause. Skipping a meeting allows the Fed to hold rates, with the option to hike again, while maintaining a hawkish bias (given that progress on inflation is slow/stalling, and the labor market remains tight). Waller also noted that changes in credit conditions could be a deciding factor between hiking or skipping in June or July. One important factor could be the resolution of the debt ceiling and the resulting rebuild of the Treasury cash account tightening financial conditions.
By the end of the week, markets had priced in another US hike for Jun with cuts still commencing in Nov or Dec. This repricing was also in part due to the stronger US PCE inflation reading for Apr across headline and core measures, faster consumption growth in Apr, improvement in real disposable income growth, initial jobless claims that were revised lower, an increase in new home sales, and an acceleration in the May PMI activity led by services.
The prelim global PMIs for May were mixed. The headline manufacturing PMIs recorded a fourth month of slowing momentum, with Japan the exception. The US manufacturing PMI slipped back into contraction while output growth stayed positive. Services growth remained moderate, but momentum stalled across Europe, the UK, and Aus, while growth continued to accelerate in Japan and the US. The broader release of the May PMI’s will commence this week.
Outlook for the week ahead
The next FOMC meeting is 14 Jun, meaning this is the last week before the blackout period for that meeting. There are several Fed speeches scheduled this week with possibly more to be added. The US labor market data this week will be important as the FOMC determines the path forward for policy.
US non-farm payrolls for May are expected to increase at a slower pace of +180k (prior +253k). Participation is expected to remain unchanged while the unemployment rate is expected to increase slightly to 3.5%. Job openings for Apr are expected to fall to 9.3m (from 9.6m). The ISM manufacturing PMI will be released this week along with the Fed’s Beige Book overview of regional activity.
Other inflation data will be important this week. The Euro Area prelim CPI reading for May will be released and headline CPI is expected to remain elevated at +7% while core inflation is also expected to remain elevated at +5.5%. The ECB minutes will also be released this week.
Aus monthly inflation for Apr is expected to edge below +7%. RBA Governor Lowe will provide testimony this week ahead of the RBA meeting next week.
This week, the US Treasury will auction and settle approx. $431bn in ST Bills, Notes, Bonds, and TIPS, raising approx. $100bn in new money.
QT end of May/start of June: Approx $40.3bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $33.6bn in Notes, Bonds, and ST Bills will roll off the Fed balance sheet.
A deal to suspend the debt limit (through Jan 2025) has been reached. Details are now going into draft legislation with a vote expected around midweek. The estimated X-date was updated to a likely 5 Jun 2023.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | May 22, 2023
Key events this week – US PCE inflation, FOMC minutes, Prelim PMIs May, RBNZ policy decision
Recap from last week
In his speech last week, US Fed Chair Powell gave the strongest indication yet of a potential pause in the US rate hiking cycle. He noted that the stance of policy is restrictive and there are uncertainties regarding the lagged effects of the tightening done so far, including the additional tightening from recent “banking stresses”;
“Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments,”
The justification to pause changes the focus to a forward-looking expectation that, due to long and variable lags, the full effect of policy tightening has yet to take effect (rather than a policy shift to a pause due to an obvious slowdown in the economy). After Powell’s speech last week, markets priced out the slightly higher probability of another hike in Jun.
Given that US inflation remains elevated, and the labor market remains tight, markets also started pricing out some of the near-term rate cuts and firmed up a pause through to Nov. US data last week showed the economy remained on a solid footing. US retail sales growth was positive albeit slower than expected – still reflecting a resilient consumer. Real retail sales have slowed and are shifting back toward the pre-pandemic trend. US manufacturing output growth was stronger in Apr, increasing by +1% over the prior month, led by motor vehicles, but also other durable & non-durable goods output. But the first two regional manufacturing surveys for May suggest some weakness in manufacturing could return. US housing activity, especially homebuilder sentiment, has continued to improve (led by the South and the West). Existing home sales were weaker in Apr. Importantly, the initial claims spike from last week was revised lower and claims fell back in line with the recent trend. Continuing claims remained stable.
Other global inflation data was mostly higher than expected. The BoC is still on a “hawkish hold” as Canadian headline inflation accelerated slightly to +4.4% in Apr and +0.7% over the month. The ECB has remained more hawkish with Euro area headline inflation confirmed at +7% in Apr and +0.6% over the month. Japanese CPI growth accelerated this month across headline and core measures. The BoJ preferred measure of inflation accelerated to +3.4% over the year with the monthly pace accelerating to +0.7% – the fastest monthly pace so far in this cycle.
The RBA minutes indicated that arguments were ‘finely balanced’ in deciding to hike by 25bps in May. After pausing in Apr, the Board was ultimately concerned about the upside risks to inflation and was buoyed by strong employment growth in Mar. The Aus data last week may weigh unevenly on the RBA decision next month; despite stronger than expected wage growth in Q1 of +3.7% (from +3.4% in Q4), employment for Apr was weaker than expected. The small decline in employment added to the increase in labor supply, resulting in a higher unemployment rate of 3.7% (from 3.5%). Signs of a weakening labor market will likely be a concern for the RBA.
Outlook for the week ahead
There will be continued headline risk from US debt ceiling negotiations this week and US Treasury Secretary Yellen is expected to provide an update on the ‘x-date’. Headline risk is likely to remain elevated, especially leading into the holiday long weekend.
US data will focus on inflation for Apr, housing, consumer income, spending, manufacturing, and growth momentum going into May. This will provide important input for assessing the path of the economy, amid expectations of an imminent slowdown. Headline PCE inflation is expected to ease slightly to +3.9% over the year while increasing over the month to +0.4%. Core PCE inflation is expected to be unchanged at +4.6% over the year. The final University of Michigan consumer sentiment reading for May will be released on Fri and will provide an update on the surprise spike higher in longer-term inflation expectations (up to +3.2%) reported in the prelim release.
There will also be several US Fed speeches throughout the week, including Governor Waller on the economic outlook.
The FOMC minutes of the May meeting will be released. This may provide some insight into discussions around the conditions for further hikes or for a pause in the hiking cycle. The minutes may also provide some insight into financial stability reports from staff.
The RBNZ will meet this week and it is expected to hike rates by another 25bps to 5.50%.
Finally, the prelim Global S&P PMIs will provide the first view of growth and activity momentum for May across key developed markets. The prelim May PMIs will be important in indicating whether stronger momentum, led mostly by services, has continued in Q2.
This week, the US Treasury will auction and settle approx. $322bn in ST Bills and FRNs, raising approx. $41bn in new money. The US Treasury will also auction the 2-year, 5-year, and 7-year Notes this week which will settle at the end of the month.
QT: Approx $14bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | May 15, 2023
Key events this week – US Retail Sales, US Fed Chair Powell, Central Bank speeches, RBA Minutes, global CPIs for Apr; Canada, Japan, Euro Area
Recap from last week
There was a small deceleration in annual US inflation for Apr. Inflation remains high with headline CPI growing at +5% and core CPI at +5.5%. The more recent 3mth and 6mth annualized time frame shows that headline inflation continues to ease. But this is less so the case for core CPI with recent time frames still showing persistent inflation pressure. Some of the underlying changes in the CPI were more positive this month with a further slowdown in the trend of the monthly shelter price growth. Will it continue? Slowing shelter price growth is central to most forecasts for overall slowing inflation.
The trimmed mean inflation has remained elevated through this cycle so far, suggesting that inflation pressure has been broad across expenditure categories. While the annual trimmed mean inflation rate slowed only slightly to +6.1% in Apr, the monthly rates have been slowing more consistently and the 3mth annualized rate is now down to +4.2%. This may indicate that broader inflation pressure has eased faster over the last few months.
But other data pointed to slower progress on inflation. Last week, the University of Michigan consumer inflation expectations over five years increased to +3.2% – the highest in over a decade. The Atlanta Fed wage data for Apr showed wage growth remained at an elevated level.
Was this CPI report enough for the FOMC to pause next month? Markets say yes for the moment – but there is still a lot of data before the next meeting. The challenge for the FOMC will be getting persistent inflation down to the 2% target without any further tightening and especially while the labor market remains tight.
Still, the first interest rate cuts remain priced in for Sep – indicating that the US economy is expected to weaken. Some data last week added weight to this outlook. Growth in initial claims shifted notably higher to +264k. But it was alleged that fraud was driving some of the increase in claims (Source; Bloomberg). The other report was the loan officer survey. While the survey showed no shift up to a ‘considerable’ tightening in credit conditions (resulting from the recent bank failures), credit conditions have continued to tighten and some demand for credit has slowed further. This provides a headwind for the growth outlook.
Outlook for the week ahead
The most recent US PMIs indicated that momentum improved somewhat in the US in Apr, so data this week will be about confirming that shift in momentum going into Q2. Retail sales growth is expected to increase to +0.7% in Apr, supported by stronger growth in motor vehicle sales. Overall US industrial production for Apr is expected to remain flat/weaker at -0.1%. The first regional manufacturing surveys for May will provide some insight into the trend in manufacturing activity. There will also be important housing data. Existing home sales for Apr are expected to slow to 4.3m (annualized rate), while home builder sentiment for May is expected to stay unchanged. New permits and starts for Apr are expected to be little changed.
There will be a lot of central bank-speak this week. This will include a discussion between US Fed Chair Powell and former Fed Chair Ben Bernanke on Friday. US Fed Vice Chair for Supervision Barr will also give two days of testimony.
More global inflation data for Apr will be reported this week. Canada’s CPI is expected to slow to +3.7% over the year, but increase to +0.9% over the month. Japan’s CPI ex fresh food is expected to stay elevated at +3.1%. The Euro Area headline inflation for Apr is expected to be confirmed at +7% over the year and +0.7% over the month.
Finally, the RBA will release the minutes of the last meeting, and this should provide insight into the decision to increase rates after deciding to pause at the prior meeting. The important Aus wage growth data for Q2 will be released and wage growth is expected to accelerate to +3.6% and by +0.9% QoQ. The Aus labor market survey for Apr will also be released and net employment growth is expected to slow to +25k, while participation (66.7%) and unemployment (3.5%) remain unchanged.
Headline risk around debt ceiling negotiations will remain elevated.
This week, the US Treasury will auction and settle approx. $436bn in ST Bills, Notes, and Bonds, raising approx. $31bn in new money. The US Treasury will also auction the 20-year Bond and 10-year TIPS this week – both will settle at the end of the month.
QT: Approx $48bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $29bn in Notes & Bonds will mature on the Fed balance sheet this week and will be redeemed.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
by Kim | May 1, 2023
Key events this week – Central bank decisions; FOMC, ECB, and the RBA, US non-farm payrolls, Eurozone CPI, global PMI’s Apr
Recap from last week
Data continued to highlight slower US growth momentum while core inflation remained persistent.
US real GDP growth slowed notably in Q1 to +1.1% (expecting +2%). Growth has been slowing over the last two quarters and is expected to underperform given the stage of the tightening cycle. In Q1, personal consumption expenditure made a larger positive contribution to GDP growth, but this was offset by stalling inventory growth. The recent decline in domestic investment expenditure slowed, which was positive, partly due to a slower decline in residential investment. Net exports made a smaller contribution to growth even as both exports and imports increased over the quarter.
Inflation and wage growth pressures persisted into Mar. The headline PCE inflation slowed as energy prices continued to fall and food inflation also slowed further. But measures of core inflation were little changed at +4.6% in Mar (from +4.7% in Feb). The trimmed mean PCE inflation was unchanged at +4.7% in Mar highlighting that price pressures remain broad. As a measure of wage growth, the Employment Cost Index (ECI) growth accelerated slightly over Q1. Over the year, the ECI growth slowed to +4.8%.
The monthly PCE data places a question mark over the strength of US household expenditure growth in Q1 GDP though. The increase in the quarter was led mostly by the peak in Jan. Through Feb & Mar, real expenditure was flat to slightly down compared to Jan, suggesting a loss of momentum towards the end of the quarter. Expenditure growth was supported by real disposable income growth led by the large increase in non-farm payrolls in Jan, cost of living adjustments for transfer payments (Jan), wage growth, and slower headline inflation. Personal savings (surplus of income over spending) continued to recover over the quarter and to a greater degree in Feb and Mar. Some of these positive income effects may fade and there is likely some caution building amid negative news on the economy.
Despite the slowdown in growth, US initial claims show little sign of weakening yet with new claims falling last week to +230k (expecting a slight increase to +250k) while continuing claims were unchanged at the higher level. US new home sales increased more than expected and mortgage applications also increased.
Aus quarterly CPI showed inflation slowing but remaining elevated at +7%. It will likely be enough of a slowdown for the RBA to keep rates on hold again this month. Much of the disinflation to date has come from tradable/goods categories (petrol prices) while domestic/non-tradable inflation continued to increase.
Outlook for the week ahead
This will be a big week of central bank meetings and important economic data. These are the highlights for the week;
The FOMC is expected to hike rates again by 25bps. This will bring the FOMC in line with its SEP expectation of a peak in rates for this cycle. The FOMC may indicate a pause from here – balancing slower growth momentum and persistent inflation which will likely require rates to stay higher. Markets continue to price in cuts for later in the year.
US labor market data will feature this week, including non-farm payrolls at the end of the week. Payroll growth is expected to slow to +180k this month, while unemployment is expected to remain at a low of 3.5%. JOLTS data for Mar is expected to show a fall in job openings to 9.6m. This is effectively the FOMC soft landing scenario of slowing payroll growth without a meaningful rise in unemployment. The US ISM surveys for Apr this week will provide a view of growth momentum across manufacturing and services going into Q2.
The ECB is expected to increase rates by 25bps this week. The Euro area prelim CPI for Apr will be released before the ECB meeting. Headline inflation is expected to remain extremely high at +0.9% over the month, but slowing to +7% over the year. Core inflation is also expected to remain extremely high at +1.1% over the month and +5.7% over the year.
The RBA is expected to keep rates on hold as inflation begins to slow. RBA Governor Lowe will also speak after the board meeting at a scheduled event.
Global PMIs for Apr will be released this week, providing some broader context of growth momentum going into Q2.
This week, the US Treasury will auction and settle approx. $477bn in ST Bills, CMBs, Notes, FRNs, and Bonds, raising approx. $46bn in new money.
The US Treasury quarterly financing estimates for Q2 and Q3 will be released this week (1st and 3rd May).
QT: Approx $33.7bn in ST Bills, Notes, and Bonds will mature on the Fed balance sheet this week and will be reinvested. Approx $43.5bn in Notes and Bonds will mature on the Fed balance sheet (30 Apr) and will be redeemed.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
